Cramer's 'Mad Money' Recap

Trading Around a Core Position

"Knowing how to trade makes you a better investor," Cramer told viewers, as he outlined another of his key trading principles, trading around a core position.

Cramer explained that the typical "buy and hold" investment strategy would tell you that if you wanted to own 300 shares of a company, buy 100 shares now, then another 100 next month, and so on, then hold them indefinitely. But this strategy is flawed, said Cramer, when you account for the increasing market volatility.

Cramer said a better way to invest is via what's called "trading around a core position." So in the previous scenario, if you wanted to own 300 shares, investors would buy their positions, on weakness of course, then actively manage that position as the market dictates.

Cramer said if the stock increases by 3%, sell 50 shares. If the stock pulls back by 3%, buy some shares back. He said it may seem like small potatoes, buy trading these small blocks add up quickly.

Trading around a position provides investors with small gains that add up over time, he said.

Tipping Point

Cramer's final tip for investors dealt with knowing when to sell a hot stock. He said his rule of thumb for years has been that when a hot little upstart receives its fourth analyst covering the stock, the party is over.

Cramer used drink maker Hansen Natural (HANS) to illustrate his rule. Hansen was the hottest stock out there in 2005, when it traded for just $18 a share. Buy mid-2006, Hansen was still a darling of Wall Street, and seemed unstoppable trading at $200 a share. But then something changed.

Cramer said that on May 10, Goldman Sachs started covering the stock. He said that Goldman's coverage was Hansen's fourth analyst, and at that point, just about everyone who wanted to invest in Hansen, already had. The company's skyrocketing momentum came to an abrupt end just two months later.

Cramer said his bottom line was that hot momentum stocks are often worth owning, buy investor must know when to sell, and when too many Wall Street analysts jump on a company's bandwagon, the party is likely coming to an end.

-- Written by Scott Rutt in Washington D.C.

To watch replays of Cramer's video segments, visit the Mad Money page on CNBC.

Want more Cramer? Check out Jim's rules and commandments for investing from his latest book by clicking here.

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